Is Wal-Mart’s Stock a Sell as Workers Fight Back?

Wal-Mart Stores Inc. (NYSE:WMT) has long been a favorite of many of Wall Street’s most influential investors. If you believe in “whale watching” you may be interested to learn George Soros dumped about 50 percent of his position in Wal-Mart in the third quarter of 2012. On the other side of the coin, Warren Buffet maintained his 4.4 percent holding in the company, preserving Wal-Mart’s position in his top ten list.

All this occurred before the company’s November 15 earnings release that failed to impress investors and led to a 5 percent drop in the share price. Earnings showed a slight beat and revenue a slight miss, but it was the forecast that told the tale. This was bad timing for Wal-Mart as the Dow has dropped close to 1,000 points since the presidential election in anticipation of a cliff dive into yet another recessionary period. Given that fear amidst a wall of global worry, is WMT right now a BUY, a WAIT and SEE, or a STAY AWAY?

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Right now, every stock on every exchange is facing the same catalyst – a deal or no deal on the so-called fiscal cliff. If a long-term grand bargain gets done, look for the mother of all stock market rallies. If the proverbial can ends up down the road, brace yourself for a plunge. Tax policy is a catalyst within the broader catalyst. Investors are bailing out in anticipation of rising capital gains tax rates. At the start of a new tax year, certainty could bring some of those investors home to the markets, adding fuel to the fire.

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E = Equity to Debt Ratio is Close to Zero

On its face, Wal-Mart’s debt position is less than impressive. A debt to equity ratio of 0.78 with total debt of $57.5 billion against $8.6 billion in cash is nothing to shout from the rooftops. Compared to one of the company’s slightly upscale competitors, Target (NYSE:TGT), Wal-Mart does not look so bad. Target’s debt to equity ratio is 1.16 with $18.6 billion in debt and only $1.5 billion total cash. But low-end retailer Dollar Tree (NYSE:DLTR) beats them both by a country mile. Dollar Tree has a debt to equity ratio of 0.17 with total debt of $264 million and a healthy total cash position of $222 million.

A = A-Level Management Runs the Company

Wal-Mart management has done what many iconic companies in history have failed to achieve. WMT has continued to grow in spite of the death of legendary founder and retailing genius Sam Walton. Management successfully dealt with the Mexican bribery scandal but now faces what could be the biggest challenge in the company’s storied history. Wal-Mart workers are expressing discontent with wages, hours, and working conditions through a non-union group called OUR Wal-Mart (Organization United for Respect at Wal-Mart). Company management has filed a complaint with the National Labor Relations Board (NLRB) claiming the group is a front with union backing. Watch this one closely as the implications are huge.

T = Technicals on the Stock Chart are Strong

Wal-Mart’s technicals were looking good going into the post-election panic selling. As of November 16, 2012, the stock price was 7.7 percent below its 20 Day Simple Moving Average; 8.38 percent below its 50 Day SMA; and still 1.35 percent above the 200 Day SMA. However, the Relative Strength Indicator has dropped below 20, indicating a strong signal the stock is currently oversold.

S = Support is Provided by Institutional Investors & Company Insiders

Wal-Mart has one of the lowest percentages of institutional ownership of any Dow component at a mere 30.3 percent. In contrast, fellow big-box retailer Home Depot (NYSE:HD) is 74.4 percent institutionally owned. The top five holders are Vanguard Group, Wellington Management, BlackRock Institutional Trust, Berkshire Hathaway, Fidelity Investments, and the Bank of New York Mellon.

E = Earnings Are Increasing Quarter over Quarter

WMT’s earnings grew 8.36 percent quarter-over-quarter and 9.19 percent over 5 years. That is superior to rival Target’s 3.35 percent quarter-over-quarter growth and 5.95 percent increase over 5 years. Both pale in comparison to an impressive quarter-over-quarter increase of 32.89 percent coupled with a 26.72 percent rise over the past 5 years at Dollar Tree. 

E = Excellent Relative Performance to Peers

Dollar Tree also has the best Return on Equity of 33.83 percent with operating margins of 12.04 percent. Wal-Mart’s ROE of 23.58 percent bests Target’s 18.95 percent; but trails in operating margins with 5.94 percent versus 6.22 percent at Target.

T = Trends Support the Industry in which the Company Operates

In response to increased discounting from all sides in the retail space, Wal-Mart was forced to return to its more aggressive pricing strategies. Given the continued shrinkage in the purchasing power of the company’s customer base, this is a trend likely to continue. In addition, the superior performance of smaller rivals like Dollar Tree and Dollar General (NYSE:DG) indicate low-end customers may be abandoning Wal-Mart. In some ways the company suffers from its own success as in the U.S. market Wal-Mart is running out of places to plant its flag. Growth will have to come from emerging markets and the company is committed to do so.

In the early days of the financial crisis some higher end consumers looked to Wal-Mart for lower prices but that may be over. Current trends indicate a gradually recovering economy is causing higher income consumers to spend more but lower income shoppers are still reluctant to spend.

Conclusion

At best, Wal-Mart is a WAIT and SEE, with the minimum wait until after a resolution of the fiscal cliff. The tax hikes at the bottom of the cliff affect earners at all levels and that will not be good for Wal-Mart in particular as lower income earners will be facing payroll tax increases. At worst, Wal-Mart is a STAY AWAY due to its labor issues. Right now, the company has the upper hand, but if income inequality moves from the periphery to a central issue about which more Americans are concerned, the picture could change. As the country’s largest employer, Wal-Mart has undue influence on prevailing wage rates. 

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.